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Our Ask Performancing feature for this week is about filing taxes. The question was posted on the Hive by none other than my fellow contributor Jeff Chandler.

During the year, I received payments through paypal for contractual work for one site while receiving more payments from another site for contractual work. However, I am beginning to wonder how I am going to pay taxes on the money I am making through writing.

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My question is, how should I file taxes? Should I report the money that I have received through paypal from the various sites I have written for as income on my income tax filing or should I file a 1099 e on my own behalf? Or, should I not file anything and considering the payments through paypal as under the table? I’ve been told by others that I have asked that the money that goes from paypal to my account which is not taxes will eventually come back to haunt me if I don’t report it.

The short answer here is that it’s best that one consult with an accountant or the tax authorities in your country, state or locality. The problem with running a business that’s not necessarily limited by geographic boundaries (like a blog network, and like writing for blogs) is that it might be difficult to determine tax jurisdiction or responsibility. And what applies to one person might not necessarily be applicable to the other.

For instance, a blog network may be a registered corporation in country A. But most of its staffers and writers reside in countries B, C and D. And most of the advertisers or sponsors come from country X. That’s a lot of money floating around in cyberspace, and who knows which taxman you should be paying money to.

I’m an economist, but taxation wasn’t exactly my best subject back in college and grad school. But here are a few suggestions from our fellow Hive members.

Ahmed says:

Best way is to setup a ltd company and work through that. Second best option is to skip taxes, but obviously that’s not a serious recommendation.

While Ahmed’s “second best option” isn’t exactly a serious recommendation, I would say that most bloggers earning money on the side (as a hobby, or just to pay the utility and hosting bills) probably take this option.

HART, who is also an accountant from Canada says:

… I’m almost sure that you would NEVER file your own 1099 form – Employers send these out to subconctractors (never employees) and is just a record of what they pay.

If you get one – it’s easier, but I don’t think they do that for bloggers/writers. Here in Canada only certain industries are included in the types of subcontractors who receive our own version of this form (gravel companies, trucking industry, etc).

Just collect all your data from Paypal .. gross revenues received less paypal fees, maybe payouts for subscriptions, promotion (donations no official receipts), software purchases, etc etc. And do the same for your offline.

If you live with your parents, you probably don’t have any business use of residence – but if you have your own home, you would keep track of all 100% home type of expenses (heat, water, electricity, property taxes, mortgage interest, maintenance affecting whole house e..g. furnace repairs, etc) and can take a pro-rata share of your office in your home to your total home space.

If you bought a computer during the year, I would ‘capitalize that’ and I think there are some us tax benefits on new purchases (but not sure). If you already had a computer at the beginning of year, estimate its fair market value and set up something.

For other expenses – look at schedule C and your IRS site forms related self-employment.

And, contact a CPA if you are preparing your taxes yourself or, have some cash discounting site prepare your taxes (like an HR Block etc) at least once or for a consultation.

Based on what’s been discussed so far, the solutions here involve either setting up a corporation (because LLCs usually have more allowed deductibles than individual taxpayers, and shield the invidivual from liability), or file as a freelancer. But then there might be nuances to this. What type of LLC can you set up? What kind of freelance activity should you declare? What would best minimize your tax burden, while still paying what is fair?

Aside from sending your receipts and figures to your accountant for computing your tax dues, there are also companies that specialize in handling these burdensome matters for freelancers and contractors. In the UK, for instance, umbrella services can act as your “employer” and your work would essentially be as a “contractor.”

Who said problogging was easy? Writing and marketing is hard enough. But thinking of tax matters would surely cause a bigger headache. If you have a good, detailed solution, I’d love to hear about it.

Having handled publisher support for Performancing Ads for quite a while now, I could say that much of the inquiries revolve around affiliate payouts. Frankly, the way the affiliate system was originally setup, we were worreid about fraud, and we’ve had to implement measures to mitigate this. This came at the cost of having our users wonder what the heck was happening with their referrals, though. Raw referrals did not guarantee the $10 affiliate fee, but rather those who have installed their ad code for 30 of days were considered eligible referrals, and were credited to the referring account.

But this was still open to fraud, and legitimate users were still inconvenienced by not knowing how and when exactly they could get their money earned. So Performancing Ads is now implementing a new, easier-to-understand affiliate scheme. As Chris Garrett explains:

So the new system is much easier to understand and has fraud prevention built-in.

Rather than a flat $10 you will get 5% of whatever your referrals buy or sell, ongoing while they remain a member.

So if you refer someone who sells an ad worth $100 you get $5. If you refer someone who buys a $100 ad you get $5. And you keep getting those commissions for each ad they renew or continue to sell.

In short, there will no longer be that per-referral commission of $10, because this was inherently unsustainable both on our part and on the users’. If fraud were prevalent, then we’d be liable for paying out commissions for non-performing accounts. This would later on force us to go under and eventually shut down. That way, nobody wins. But our motto is Everybody Wins! So we would want everybody–that is, legitimate and productive members of the system–to benefit.

What’s great here is that if you get to refer a really active publisher or advertiser, then you would earn really well, in terms of commissions, instead of only earning a flat one-time fee for a single referral.

And so, we’re hoping our users and patrons would like this new scheme.

We would, of course, still pay out all eligible referrals left over from the old system (or have we already done so via our automatic end-of-month payments?). Starting this month, we’re hoping our users would then net more from new referrals.